Controlling Economic Diarrhea with Adhesive Tape

Some people never learn. Give a klutz a hammer and he’ll smash his thumb every time. Give a boozehound a bottle of Strawberry Boone’s Farm and he’ll guzzle it down en route to get another and another…until it practically kills him. Likewise, give a Princeton professor chairmanship of the Federal Reserve and he’ll print up money until the currency explodes.

Creating free money’s a good gig, if you can get it. Particularly, when times are good. That’s when a Federal Reserve Chairman appears a maestro. But when the economy takes a dive – or two – the truth comes to light… A central banker is nothing but a quack.

Economic growth for the first six months of 2011 is at 0.7 percent. Factor in inflation, and the economy’s going not forwards; but backwards. Most folks are getting squeezed.

Earlier this week we learned that the Consumer Confidence Index for August dropped 14.7 points – or nearly 25 percent – to 44.5. The last time consumers were this unconfident was April 2009…when the economy was officially in recession.

Over the past week stocks have generally moved in the direction that makes people feel smart. What we mean is, with the exception of yesterday’s 120 point selloff, they’ve gone up. After briefly falling below 11,000 last Friday morning, even with yesterday’s harrowing drop, the DOW is up 571 points.

Obviously, the economy doesn’t have much in the way to offer to support this boost. But these days bad economic news is good news for stocks. Because bad economic news increasing the likelihood of more funny money. Especially, when there’s a fidgety school teacher manning the monetary controls…

Popular Market Refrains

A popular Wall Street refrain is “buy the rumor, sell the news.” We don’t know quite what this means…but saying it makes us feel smart. Perhaps it means you should buy stocks based on what might happen next because by the time it actually happens it will be too late.

This week the rumor was Ben Bernanke and his penchant for buying Treasuries. According to the minutes of the central bank’s August 9 meeting, released Tuesday, the Fed is mulling over whether it should purchase more government debt. Wall Street anticipates this will be a great boon for the stock market.

Looking back to the rumor of QE2, first considered publicly by Bernanke at last year’s Jackson Hole, Wyoming, retreat on August 27, 2010, we discover that, on that day, the DOW was at 9,985. By the time QE2 actually kicked in on November 3, the DOW was at 10,789 – an increase of 8 percent just on rumor.

The DOW continued its run…reaching a peak of 12,810 on April 29, 2011. Then, if you’d followed another popular market refrain, “sell in May and go away,” you would have missed out on this year’s mid-summer chasm.

Now, having looked back, we must look forward. What does Bernanke’s latest rumor really mean?

What this will do for stocks we don’t have the slightest inkling. What this will do for the economy we have an opinion or two…

Controlling Economic Diarrhea with Adhesive Tape

For one thing, more Federal Reserve asset purchases won’t do a darn thing for the economy…except suspend the inevitable. But what good is life support when the economy has already reached a vegetative state?

Several trillion dollars hasn’t shocked it back to life. Yet, as we mused above, some people never learn. In Bernanke’s case, he’d rather vaporize the currency than let markets correct. He’d rather puff up the economy with monetary gas than let it adjust to reality.

Sometime between now and the end of the year the Fed will do something really foolish. They will embark on a new program. They’ll tell us it’s for our own good.

But what can they really do than what they’ve already done? In other words, all they can do is inflate the money supply and distort credit markets.

However, after the bad wrap quantitative easing received during QE2, when word got out that it is nothing more than good old-fashioned money printing, the Fed will likely call it something else…like interest rate capping.

Interest rate capping, without a doubt, is an extreme form of government intervention into markets. In plainest and simplest terms, interest rate capping is price controls. For it is fixing the price of money.